Do Local Subsidies to Attract Companies Reduce Welfare?

The lead story on the NYTimes on local subsidies for companies today takes a more skeptical stance than Enrico Moretti and Michael Greenstone in this paper:

Increasingly, local governments compete by offering substantial subsidies to industrial plants to locate within their jurisdictions. This paper uses a novel research design to estimate the local consequences of successfully bidding for an industrial plant, relative to bidding and losing, on labor earnings, public finances, and property values. Each issue of the corporate real estate journal Site Selection includes an article titled “The Million Dollar Plant” that reports the county where a large plant chose to locate (i.e., the ‘winner’), as well as the one or two runner-up counties (i.e., the ‘losers’). We use these revealed rankings of profit-maximizing firms to form a counterfactual for what would have happened in the winning counties in the absence of the plant opening. We find that the plant opening announcement is associated with a 1.5% trend break in labor earnings in the new plant’s industry in winning counties, as well as increased earnings in the same industry in counties that neighbor the winner. Further, there is modest evidence of increased expenditures for local services, such as public education.

Property values may provide a summary measure of the net change in welfare, because the costs and benefits of attracting a plant should be capitalized into the price of land. If the winners and losers are homogeneous, a simple model suggests that any rents should be bid away. We find a positive, relative trend break of approximately 1.1-1.7% in property values. Since the winners and losers have similar observables in advance of the opening announcement, the property value results may be explained by heterogeneity in subsidies from higher levels of government (e.g., states) and/or systematic underbidding. Overall, the results undermine the popular view that the provision of local subsidies to attract large industrial plants reduces local residents’ welfare. 

 

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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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2 Responses to Do Local Subsidies to Attract Companies Reduce Welfare?

  1. What about the effect on existing facilities in the same industry? It’s not a question of the local community benefiting when it wins, but what the overall effect of the subsidy wars is. Timothy Bartik has given some estimates of the disparity between local payoffs and national payoffs from providing a location subsidy in his book *Investing in Kids* (see also his blog of the same name, http://investinginkids.net/). More anecdotally, for every new car and truck assembly plant that opened from 1979-91 in the U.S. and Canada, one closed, according to economic geographer James Rubinstein. All of the new plants received location incentives. Less anecdotally, the East-West Gateway Council of Governments, the regional planning body of the St. Louis metropolitan area, found that the 100+ municipalities in the region gave $2 billion in subsidies to retail from 1990 to 2007, but the area only added 5400 jobs in the retail sector in that time as new malls hurt older malls and drove some out of business. That would be a cost of $370,370 per job, which is insane for a retail job. And actually, the cost is probably infinite, because income growth in the region is the most likely reason there was growth in retail jobs. (http://www.ewgateway.org/pdffiles/library/dirr/TIFFinalRpt.pdf)

  2. Pingback: Coveting Thy Neighbor’s Manufacturing – Is State Tax Competition A Zero Sum Game? | owenzidar

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